Last updated on August 20th, 2024 at 12:13 pm

Tax and Christmas Parties for Small Businesses

As I write this (at the start of October) the Christmas season is approaching and many businesses are starting to make plans for staff parties (possibly prompted by emails from venues offering Christmas works parties) or even bonuses and gifts.  I thought I’d like to make you aware of the various tax rules surrounding this issue in the UK as they currently stand (2011 – checked and updated slightly in 2024).

Christmas parties

Parties can be a tax-efficient way of rewarding employees. This is because, according to the HMRC,  employees and their partners do not pay tax and national insurance on any parties they attend if the cost to the business is less than £150 per head in the tax year (starting 6th April). The cost of the function includes VAT and the cost of transport and/or overnight accommodation if these are provided to enable employees to attend. Divide the total cost of each function by the total number of people (including non-employees) who attend in order to arrive at the cost per head. The event must be made available to all employees or (if you have more than one location) all those at a location.

Photo by cottonbro studio: https://www.pexels.com/photo/people-toasting-wine-glasses-3171837/

There are some things you need to be aware of though. If the cost per head of a single party is greater than £150, then the whole amount would be subject to tax and NI.  For example, if the cost of a party averages out to £175 per head the employee is taxed on the full amount (and if they have a partner then they would be taxed on a benefit of £350). In another scenario if the employer laid on 3 parties over the course of the year costing £100 per head then £70 per head then £45 per head, then tax and NI would be levied on the £70 party. Though the £100 and £45 parties would be covered by the £150 annual exemption, the £90 party wouldn’t and so the whole event was taxable. This page http://www.hmrc.gov.uk/manuals/eimanual/EIM21691.htm has further examples of when parties may not qualify for the exemption.

Cash gifts and bonuses to employees

This is a little easier to understand and are normally, cash gifts and bonuses are treated as normal pay and subject to tax and National Insurance (NI) in the normal way. The payment should be put through the payroll and tax / NI deducted at source as with the normal pay. This also applies to any vouchers you give that can be exchanged for goods or services.

However, gifts to employees that can be considered trivial benefits such as a turkey, ordinary bottle of wine or box of chocolates will not need to be declared on form P11d as long as the cost of the gift does not exceed £50. For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned.

If your business decides to give employees more substantial gifts, such as larger hampers or gift vouchers, these will be subject to tax and NICs. The value of the gift must be reported on the employee’s P11D form and will be treated as a benefit-in-kind, subject to tax and NICs.

In such cases you should treat all the factors objectively and use your judgement but remember that you may need to justify your decision to the HMRC.

Common Pitfalls to Avoid

When planning your Christmas party, there are a few common pitfalls to be aware of to ensure that you stay within the rules:

• Exceeding the £150 Limit: As mentioned earlier, if the cost per head exceeds £150, the entire amount becomes taxable. Careful planning and budgeting are essential to avoid this.
• Mixing Business and Non-Business Entertainment: Ensure that the party is primarily for employees and not clients or business partners. Mixing business and non-business entertainment can complicate tax and VAT claims.
• Inadequate Documentation: Keep detailed records of all expenses related to the party, including invoices, receipts, and attendance lists. This documentation is crucial if HMRC questions your claims.

Although the above is based on the HMRC guidance you should, as with all tax matters, check with a qualified professional before you take any action that might involve you or your employees in any tax problems.  After all, a couple of minutes on the phone to your local accountant could save you hours if not days of work and considerable expense should a bad decision be made and picked up by the tax inspector.